American International Group Inc. (AIG) reported fourth-quarter 2014 operating earnings per share (EPS) of 97 cents, which missed the Zacks Consensus Estimate by a dime and declined 14% year over year. The underperformance failed to reflect the company’s focus on expense and balance sheet management.
On a GAAP basis, including extraordinary items, AIG reported a quarterly net income of $655 million or 46 cents per share compared with $2 billion or $1.34 per share in the year-ago quarter.
Operating net income of $4.58 for 2014 missed the Zacks Consensus Estimate by 3.2% but improved 2% over 2013.
Behind the Headlines
Effective fourth quarter 2014, AIG is reporting under two segments: Commercial Insurance and Consumer Insurance.
Pre-tax operating income at Commercial Insurance improved 26% year over year to $1.2 billion, driven by better performing Property Casualty and Mortgage Guaranty. However, the soft performing Institutional Market limited the upside.
Results at Property Casualty benefitted from better underwriting results, partially offset by lower net investment income. Lower losses and loss adjustment expenses incurred, increase in first-lien premiums earned, and a litigation settlement related to second-lien mortgages favored performances at Mortgage Guaranty. Lower returns on alternative investments affected results at Institutional Markets.
Pre-tax operating income at Consumer Insurance however declined 21% year over year to $923 million. Lower income at Retirement and Life were responsible for the decline. However, a solid performance by Personal Insurance limited the downside.
Favorable equity market performance in the year-ago quarter that impacted alternative investment income, future policy benefits and related amortization of deferred policy acquisition costs weighed on Retirement results. Income at Life suffered due to increasing reserves for incurred but not reported death claims. However, improved underwriting favored Personal Insurance results.
Financial Update
In 2014, AIG issued $3.3 billion of senior unsecured debt. Additionally, in January 2015, AIG issued $2.0 billion of senior unsecured debt
AIG repurchased $5.0 billion notional of high coupon AIG hybrid and senior notes for $6.5 billion in 2014.
Total repurchased or redeemed DIB debt was $7.5 billion notional for $8.4 billion in 2014.
Shareholders’ equity totaled $106.9 billion at Dec 31, 2014, up from $100.5 billion at the end of 2013.
Cash, short-term investments, and unencumbered fixed maturity securities totaled $9.8 billion compared with $13.1 billion as of 2013 end.
At year-end 2014, AIG’s reported book value per common share, including accumulated other comprehensive income, rose 13% year over year to $77.69. However, 2014 operating return on equity declined to 6.9% from 7.4% in 2013.
Capital Deployment Update
AIG bought back about 27.9 million shares for $1.5 billion during the reported quarter, taking the full-year tally to $4.9 billion.
On Feb 12, 2015, AIG’s board of directors approved a $2.5 billion share buyback and declared a quarterly dividend of 12.5 cents per share.
Zacks Rank
Currently, AIG carries a Zacks Rank #3 (Hold).
Performance of Other Multi-Line Insurers
Bottom line at MGIC Investment Corp. (MTG), Cigna Corp. (CI) and Assured Guaranty Ltd. (AGO) outperformed their respective Zacks Consensus Estimate in the fourth quarter.
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